south central rural telecommunications … · in accordance with government auditing standards, we...

SOUTH CENTRAL RURAL TELECOMMUNICATIONS

COOPERATIVE, INC. AND SUBSIDIARY

________

Report on Audit of Consolidated Financial Statements and Supplementary Information

For the Years Ended

June 30, 2017 and 2016

C O N T E N T S ________

Pages

Independent Auditors' Report 1-2

Financial Statements:

Balance Sheets 3-4

Statements of Operations 5

Statements of Comprehensive Income 6

Statements of Patronage Capital and Other Equities 7

Statements of Cash Flows 8-9

Notes to Financial Statements 10-17

Supplementary Information:

Independent Auditors' Report on Consolidating and

Supplementary Information 18

Schedule I - 2017 Consolidating Balance Sheet 19

Schedule II - 2017 Consolidating Statement of Operations 20

Schedule III - 2016 Consolidating Balance Sheet 21

Schedule IV - 2016 Consolidating Statement of Operations 22

Statistical and Analytical Information 23-24

Independent Auditors' Report on Internal Control over Financial

Reporting and on Compliance and Other Matters Based on an

Audit of Financial Statements Performed in Accordance with

Government Auditing Standards 25-26

Independent Auditors' Report on Compliance with Aspects of

Contractual Agreements and Regulatory Requirements

For Telecommunication Borrowers 27-29

Independent Auditors' Report Board of Directors South Central Rural Telecommunications Cooperative, Inc. Glasgow, Kentucky 42141

We have audited the accompanying consolidated financial statements of South Central Rural Telecommunications Cooperative, Inc. and subsidiary, which comprise the consolidated balance sheets as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, patronage capital and other equities and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express opinions on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

SHampton

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SHampton

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Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the respective financial position of South Central Rural Telecommunications Cooperative, Inc. and subsidiary, as of June 30, 2017 and 2016, and the results of their operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matters

Supplementary Information

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements that collectively comprise South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s basic financial statements. The consolidating schedules on pages 18-22 and the statistical and analytical information on pages 23-24 are presented for purposes of additional analysis and are not a required part of the basic financial statements. This data is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information on pages 18-22 and the statistical and analytical information on pages 23-24 is fairly stated in all material respects in relation to the basic financial statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated September 25, 2017, on our consideration of the South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s internal control over financial reporting and compliance.

Campbell, Myers & Rutledge, PLLC

Certified Public Accountants Glasgow, Kentucky September 25, 2017

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY

BALANCE SHEETS June 30, 2017 and 2016

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Continued Page 3

2017 2016Current assets:

Cash and cash equivalents 4,455,632$ 3,374,693$ Temporary cash investments 500,000 500,000

Accounts and notes receivable, lessallowance for doubtful accountsof $43,805 in 2017 and $55,935in 2016 2,250,435 2,351,218

Materials and supplies at average cost 2,525,986 2,659,477 Accrued interest receivable 4,859 4,859 Prepaid expenses 6,518,550 2,995,945

Total current assets 16,255,462 11,886,192

Other assets:Marketable securities 31,997,396 40,525,960 Nonregulated investments 800,225 823,666 Investment in affiliated companies 78,829,886 66,464,071 Other deferred charges 1,644,990 1,422,384

Total other assets 113,272,497 109,236,081

Telephone plant, at costTelephone plant in service 211,467,374 210,472,184 Telephone plant under construction 11,966,633 8,859,008

Total 223,434,007 219,331,192

Less accumulated depreciation 159,405,713 156,974,150

Telephone plant, net 64,028,294 62,357,042

193,556,253$ 183,479,315$

ASSETS

TOTAL ASSETS


BALANCE SHEETS, CONCLUDED June 30, 2017 and 2016

______________

The accompanying notes are an integral part of the financial statements.

Page 4

2017 2016Current liabilities:

Accounts payable 5,308,692$ 5,200,433$ Accrued expenses 3,298,768 3,146,671

Total current liabilities 8,607,460 8,347,104

Long-term liabilities:Deferred taxes 14,851,605 15,238,787 Other long-term liabilities 12,568,134 10,873,628

Total long-term liabilities 27,419,739 26,112,415

Members' equities:Patronage capital 43,155,347 46,334,548 Accumulated other comprehensive loss (9,246,031) (7,838,134) Other equities 121,961,826 108,757,296 Other member capital 1,657,912 1,766,086

Total members' equities 157,529,054 149,019,796

193,556,253$ 183,479,315$

LIABILITIES AND MEMBERS' EQUITIES

TOTAL LIABILITIES AND MEMBERS' EQUITIES

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY STATEMENTS OF OPERATIONS

For the Years Ended June 30, 2017 and 2016 ____________


Page 5

2017 2016

Operating revenues:Basic local network service 7,093,776$ 7,171,828$ Network access services revenues 11,966,132 12,473,308 Carrier billing and collection 328,924 445,975 Miscellaneous 1,208,314 1,169,138

Total operating revenues 20,597,146 21,260,249

Operating expenses:Plant specific operations 5,080,433 4,969,775 Plant nonspecific operations 2,837,860 2,601,804 Depreciation and amortization 9,584,659 8,917,896 Customer operations 1,999,618 1,839,547 Corporate operations 2,434,217 3,070,295 Other operating taxes 1,212,216 1,233,318

Total operating expenses 23,149,003 22,632,635

Operating income (2,551,857) (1,372,386)

Nonoperating net income 24,667,967 15,140,671

Provision for income taxes (11,463,437) (5,308,939)

Income before interest charges 10,652,673 8,459,346

Nonregulated net income (loss) 751,809 (368,363)

Net income 11,404,482$ 8,090,983$

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY STATEMENTS OF COMPREHENSIVE INCOME



Page 6

2017 2016

Net income 11,404,482$ 8,090,983$

Other comprehensive income (loss)Postretirement benefit other than pension: Unrecognized gain/(loss) on assets (1,407,897) 1,041,215

Comprehensive income 9,996,585$ 9,132,198$

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY STATEMENTS OF PATRONAGE CAPITAL AND OTHER EQUITIES



Page 7

Accumulated

OtherComprehensive

Assignable Assigned Balance Income (Loss) Other Equities

Balances, July 1, 2015 (7,413,532)$ 57,499,606$ 50,086,074$ (8,879,349)$ 98,925,564$

Distribution of patronagecapital - (1,499,997) (1,499,997) - -

Patronage capital assigned for the year ended December 31, 2015 2,276,953 (2,276,953) - - -

Retirement of patronagecapital of estatesof deceased members - (510,855) (510,855) - -

Transfer of unclaimed patronage capital 75 - 75 - -

Postretirement benefit other than pensionUnrecognized loss on assets - - - 1,041,215 -

Recallocation of prior year allocated loss - - - - -

Net income for the yearended June 30, 2016:

Operating margins (1,740,749) - (1,740,749) - - Nonoperating margins - - - - 9,831,732

Balances, June 30, 2016 (6,877,253) 53,211,801 46,334,548 (7,838,134) 108,757,296

Distribution of patronagecapital - (1,500,000) (1,500,000) - -

Patronage capital assigned for the year ended December 31, 2016 1,002,079 (1,002,079) - - -

Retirement of patronagecapital of estatesof deceased members - (181,358) (181,358) - -

Transfer of unclaimedpatronage capital - 302,205 302,205 - -

Postretirement benefit other than pensionUnrecognized income on assets - - - (1,407,897) -

Net income for the year ended June 30, 2017:

Operating margins (1,800,048) - (1,800,048) - - Nonoperating margins - - - - 13,204,530

Balances, June 30, 2017 (7,675,222)$ 50,830,569$ 43,155,347$ (9,246,031)$ 121,961,826$

Patronage Capital

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY STATEMENTS OF CASH FLOWS



Page 8

2017 2016

Cash flows from operating activities:Net income 11,404,482$ 8,090,983$ Adjustments to reconcile net income to net

cash provided by operating activities:Depreciation and amortization 11,565,560 10,712,009 Deferred taxes on income (387,182) (281,624) Changes in operating assets and

liabilities:Decrease (increase) in temporary cash

investments - (100,000) Decrease (increase) in accounts and

notes receivable 100,783 (246,408) Decrease (increase) in inventory 133,491 79,176 Decrease (increase) in prepaid expenses (3,522,605) 756,190 Increase (decrease) in accounts payable 108,259 462,432 Increase (decrease) in accrued expenses 152,097 138,113

Net cash provided by operatingactivities 19,554,885 19,610,871

Cash flows from investing activities:

Purchases of property, plant and equipment (10,660,412) (13,974,852) Plant removal costs (155,440) (203,592) Salvage recovered from retirement of plant 57,905 113,357 Decrease (increase) in nonregulated investment 23,441 33,473 Decrease (increase) in other deferred charges (222,606) 3,102,316 (Increase) in investment in affiliated companies (12,365,815) (5,863,210) Purchases of Marketable Securities (9,587,763) (13,443,125) Redemptions of Marketable Securities 14,229,565 13,839,575

Net cash used in investing activities (18,681,125) (16,396,058)

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY STATEMENTS OF CASH FLOWS, CONCLUDED



Page 9

2017 2016

Cash flows from financing activities:Distributions of patronage capital (1,500,000)$ (1,499,997)$ Retirements of patronage capital (181,358) (510,855) Principal payments to Federal Financing Bank - (1,606,221) Increase (decrease) in long-term liabilities 1,694,506 (2,327,086) Increase (decrease) in other member capital (108,174) 417,570 Transfers of unclaimed patronage capital 302,205 75

Net cash provided (used) infinancing activities 207,179 (5,526,514)

Net increase (decrease) in cash and cash equivalents 1,080,939 (2,311,701)

Cash and cash equivalents at beginning of year 3,374,693 5,686,394

Cash and cash equivalents at end of year4,455,632$ 3,374,693$

Supplemental disclosures of cash flow information:Cash paid during the year for:

Interest ($0 capitalized in 2017and $237,170 in 2016) -$ 26,134$

Income taxes 11,371,682$ 4,769,500$

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS

June 30, 2017 and 2016 _____________

Page 10

1. Summary of Significant Accounting Policies: Nature of Business:

South Central Rural Telecommunications Cooperative, Inc. (the Cooperative), provides telephone service in a nine-county area of south central Kentucky. The Cooperative grants credit to customers, substantially all of whom are local residents and commercial businesses. The Cooperative maintains its accounts in accordance with the Uniform System of Accounts prescribed for telephone companies by the Federal Communications Commission. The consolidated financial statements include the accounts of the Cooperative and its wholly-owned subsidiary, South Central Telcom, LLC. All significant intercompany accounts and transactions have been eliminated. Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management to make estimates and assumptions that affect the reporting amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period. Actual results could differ from those estimates. Telephone Plant:

The telephone plant in service and under construction at June 30, 2017 and 2016 is stated substantially at original cost, which includes material, labor, transportation and such indirect items as engineering, supervision, employee fringe benefits and interest on funds used during construction. As property units are retired in the ordinary course of business, the cost of the property plus removal cost, less salvage, is charged to accumulated depreciation. Listed below are the major classes of the telephone plant as of June 30, 2017 and 2016:

2017 2016

Organization $ 20,039 $ 20,039 Land 720,374 714,831 Buildings 8,530,781 8,482,156 Central Office Equipment 49,220,524 54,803,419 Station Equipment 997,697 997,697 Cable and Wire Facilities 140,674,468 134,532,201 Furniture and Office Equipment 716,590 719,231 General Purpose Computers 4,364,298 4,252,096 Vehicles 6,087,083 5,814,994 Garage and Work Equpiment 135,520 135,520

$ 211,467,374 $ 210,472,184

Depreciation:

Depreciation is calculated by the straight-line method designed to amortize the cost of various classes of depreciable assets over their estimated useful lives. Depreciation for the consolidated financial statements for the years ended June 30, 2017 and 2016 was $11,565,560 and $10,712,009 respectively.


June 30, 2017 and 2016 _____________

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1. Summary of Significant Accounting Policies, Continued: Deregulated Customer Premises Equipment (CPE):

Deregulated CPE is stated at cost. The Cooperative provides for depreciation on a straight-line basis at an annual rate of depreciation which will amortize the cost of the equipment over its estimated useful life. Nonregulated Investments:

This balance reflects the Cooperative's permanent investment in deregulated CPE, net of applicable depreciation, plus deregulated inventory and accounts receivable, less deregulated accounts payable. Following is a summary of net income (loss) from deregulated operations for the years ending June 30, 2017 and 2016, net of intercompany transactions:

2017 2016 2017 2016Income from operations 20,714,072$ 19,517,161$ 4,654,091$ 4,565,332$ Expenses 19,871,608 19,885,524 4,744,746 4,456,151

Net Income (loss) 842,464$ (368,363)$ (90,655)$ 109,181$

SCRTC Telcom

Cash and Cash Equivalents:

For purposes of the Statements of Cash Flows, the Cooperative considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Accounts and Notes Receivable:

The Cooperative estimates uncollectable accounts as a percentage of monthly revenues and compares this to invoices dated over 90 days when they are considered uncollectible. The Cooperative writes off receivables as a charge to the allowance for credit losses, in their estimation, it is probable that the receivable is worthless. Other Member Capital:

This balance represents unclaimed distributions of patronage capital. After a statutory waiting period, these balances will be re-assigned to the Cooperative's existing patrons. Inventories: Inventory is valued at average cost. Inventory consists of materials and expendable supplies held for future consumption or capitalization. The cost is recorded as an expense or capitalized as inventory items are consumed.


June 30, 2017 and 2016 _____________

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1. Summary of Significant Accounting Policies, Concluded:

Investment in Affiliated Companies:

This balance reflects the Cooperative's investment in partnerships and limited liability companies with other telephone companies in Kentucky, for the purpose of providing cellular telephone services and local telephone service. The investment is accounted for using the equity method. Investments in affiliated companies are listed as follows:

Percentage Owned 2017 2016

RSA #3 Partnership 25% $ 25,359,218 $ 20,660,259 RSA #4 Partnership 50% 38,458,100 32,560,178 Cumberland Cellular Partnership 12.5% 9,245,605 7,751,450 Bluegrass Network LLC 20% 5,459,203 5,160,079 Bluegrass Telcom LLC 20% 307,760 332,105

$ 78,829,886 $ 66,464,071

2. Cash and Temporary Investments:

All deposits are in various financial institutions and are carried at cost. Temporary Investments reflect Certificates of Deposit held at various financial institutions. Insured amounts reflect those covered by FDIC or by collateral pledged by the respective financial institutions. 2017 2016 Carrying Bank Carrying Bank Amount Balance Amount Balance

Insured $4,955,632 $ 7,180,104 $ 3,874,693 $ 5,717,024

Uninsured: Uncollateralized - - - - Total cash and temporary investments $ 4,955,632 $ 7,180,104 $ 3,874,693 $ 5,717,024


NOTES TO FINANCIAL STATEMENTS June 30, 2017 and 2016

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Page 13

3. Pension Plan:

All eligible non-union employees of the Cooperative participate in the National Telephone Association (NTCA) Pension Plan (R&S Plan), a defined benefit pension plan qualified under section 401 and tax exempt under section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. The Plan sponsor’s identification number is 52-0741336 and the Plan Number is 333. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. In October, 1988, the Cooperative approved the retroactive purchase of all prior service benefits as of December 31, 1988, at a cost of $487,804. Contributions to the Plan for the years ended June 30, 2017 and 2016 were $1,152,830 and $1,228,528, respectively. The Plan has been approved by the Internal Revenue Service. As the Cooperative is only one of several employers participating in the Plan, it is not practicable to determine if the vested benefits of the Cooperative's employees exceed the Cooperative's portion of the Plan assets. The following table presents certain information regarding the Plan’s status as a whole, derived from actuarial valuations performed as of the dates indicated: Pension Benefits January 1, 2017 January 1, 2016 Fair value of plan assets $ 1,944,695,966 $ 1,664,524,653 Present value of accumulated benefits (1,935,470,443) (1,835,127,306) Overfunded/(Unfunded) $ 9,225,523 $ (170,602,653) Pension Benefits January 1, 2017 January 1, 2016 Weighted – average assumptions as of January 1: Valuation interest rate 7.00% 7.00% Expected return on plan assets 7.00% 7.00%

Rate of compensation increase age related age related

On September 30, 2016, the Cooperative made a prepayment in the amount of $3,948,353 for its R&S Plan. The prepayment amount is a cooperative’s share of future contributions required to fund the R&S Plan’s unfunded value of benefits earned to date using R&S Plan actuarial valuation assumptions. The prepayment amount will typically equal approximately 2.5 times a cooperative’s annual R&S Plan required contribution. After making the prepayment, for most cooperatives the billing rate is reduced by approximately 25%, retroactive to January 1 of the year in which the amount is paid to the R&S Plan. The 25% differential in billing rates is expected to continue for approximately 15 years. However, several factors may have an impact on the differential in billing rates and the 15 year period. These factors include the following: changes in interest rates, asset returns and other plan experience different from expected as well as plan assumption changes.


June 30, 2017 and 2016 _____________

Page 14

4. Postretirement Benefits:

The Cooperative sponsors a defined benefit plan that provides medical and life insurance coverage to retirees and their dependents. Participating retirees and dependents contribute 0% of the projected cost of coverage. Spouses of employees hired before January 1, 2015 are eligible. The plan is partially funded. The following sets forth the accumulated post-retirement benefit obligation, the change in plan assets, and the component of accrued post-retirement benefit cost and net periodic benefit cost as of June 30, 2017 and 2016.

2017 2016

Accumulated post-retirement benefit obligation, beginning 29,971,171$ 29,776,477$ Service cost 1,047,607 910,914 Interest cost 1,439,444 1,329,233 Employer contribuions (788,894) (777,742) Actuarial loss/(gain) 2,299,820 (1,267,711)

Accumulated post retirement benefit obligation, ending 33,969,148$ 29,971,171$

Fair value of plan assets - beginning of year 18,227,478$ 17,580,775$ Employer contributions 788,894 777,742 Unrealized gains on assets 2,436,323 779,875 Benefits paid (1,047,607) (910,914)

Fair value of plan assets - end of year 20,405,088 18,227,478

Unfunded status 13,564,060$ 11,743,693$ Unrecognized net actuarial loss 9,246,032 7,838,135

Net amount recognized 4,318,028$ 3,905,558$

Unfunded status 13,564,060$ 11,743,693$ Current liabilities 997,930 874,891

Noncurrent liabilities 12,566,130$ 10,868,802$

Service cost 1,047,607$ 910,914$ Interest cost 1,439,444 1,329,233 Amortization of net actuarial gain 378,351 320,514 Expected return on assets (1,428,356) (1,275,923)

Net periodic benefit cost 1,437,046$ 1,284,738$

(1,407,897)$ 1,041,215$

378,351$ 320,514$ Amounts in other comprehensive income expected to be realized in the subsequent year - actuarial gain

Net amount recognized (included in other comprehensive income)


June 30, 2017 and 2016 _____________

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4. Postretirement Benefits, Concluded: The discount rate used in determining the accumulated postretirement benefit obligation was 4.5% for the years ending June 30, 2017 and 2016, respectively. Expected benefit payments from the plan for year ending June 30, 2017 total $874,981. The Cooperative contributes to a 401(h) trust that will be used to fund post-retirement benefits for future retirees. These monies are invested with NTCA, who manages such funds for cooperatives. NTCA invests in common stocks, high quality bonds, and US government securities. The estimated rates of return for plan assets are 7.00% and is based on recent historical performance. The investments of the assets are 98% in various Vanguard Funds and 2% in cash. For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was used for the year ended June 30, 2017. The anticipated future rates are as follows:

2017 6.50%2018 6.00%2019 5.50%2020 5.00%2021 5.00%

2022-2026 5.00%

An additional 1% increase in the trend utilized for measurement purposes in 2017 would have resulted in an increase in the accumulated postretirement benefit obligation of approximately $6.8 million. The Trust Committee of the NTCA is responsible for the investment of the assets of the Alternative Funding Trusts. The asset allocation of the Trust’s investments at 6/30/17 are as follows:

Investment Plan PercentageVanguard Total Bond Market Index Fund 13.7%Vanguard Total Stock Market Index Fund 24.7%Vanguard High Yield Corporate Fund 8.1%

Vanguard FTSE All World Ex US Index Fund 26.2%

Vanguard REIT Index Fund 8.3%Ishares ACWQI Minimum Volatility ETF 17.0%Cash 2.0% Total 100.0%


June 30, 2017 and 2016 _____________

Page 16

5. Marketable Securities: All debt securities of the Cooperative are considered to be held to maturity. The maturities of held to maturity investments and their approximate market values at June 30, 2017 and 2016, were as follows:

NetAmortized Unrealized Market

Cost Gains (Losses) Value June 30, 2017 32,497,396$ (594,484)$ 31,902,912$ June 30, 2016 41,025,960$ (84,358)$ 40,941,602$

Amortized Market

Cost ValueDue in one year or less (included in Temporary Cash Investments) 500,000$ 500,000$ Due after one year 31,997,396 31,402,912 Balances, June 30, 2017 32,497,396$ 31,902,912$

Amortized Market Cost Value

Due in one year or less (included in Temporary Cash Investments) 500,000$ 500,000$ Due after one year 40,525,960 40,441,602 Balances, June 30, 2016 41,025,960$ 40,941,602$

6. Income Taxes:

The Cooperative has been exempt from federal income taxes as a cooperative telephone company under Section 501(c)(12) of the Internal Revenue Code. In 1991, the Internal Revenue Service issued a Technical Advice Memorandum, which interprets certain types of revenues to be excluded in determining when the Cooperative satisfies the 85 percent income test to qualify for tax exempt status. By applying these interpretations, the Cooperative does not qualify in the current year for the tax exempt status. The Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate to income before income taxes. The primary differences result from providing for state income taxes and from deducting certain expenses for financial statement purposes but not for federal tax purposes. The provision for income taxes for 2017 and 2016 consists of the following:

Provision for Income Taxes: 2017 2016

Current tax expense 11,850,618$ 5,590,563$ Deferred tax (benefit) (387,181) (281,624)

Total 11,463,437$ 5,308,939$


June 30, 2017 and 2016 _____________

Page 17

6. Income Taxes, Concluded:

A cumulative net deferred tax liability is included in other liabilities. The components of the liability are as follows:

2017 2016

Differences in depreciation methods 14,851,605$ 15,238,787$

The Cooperative follows the recognition requirements for uncertain income tax positions as required by generally accepted accounting principles. The Cooperative has no tax position at June 30, 2017 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Cooperative’s policy is to classify income tax related interest and penalties in interest expense and other expenses, respectively. No such interest or penalties were recognized during the periods presented. The Cooperative files income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. The Cooperative is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2014.

7. Subsequent Events:

Management has evaluated subsequent events thru September 25, 2017, the date which the financial statements were available to be issued.

SUPPLEMENTARY INFORMATION

Independent Auditors’ Report on Consolidating and Supplementary Information

Board of Directors South Central Rural Telecommunications Cooperative, Inc. Glasgow, Kentucky 42141 We have audited the consolidated financial statements of South Central Rural Telecommunications Cooperative, Inc. and subsidiary as of and for the years ended June, 2017 and 2016, and our report thereon dated September 25, 2017, which expressed an unmodified opinion on those financial statements appears on pages 1-2. Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information presented on pages 18-22 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies, and it is not a required part of the consolidated financial statements. The statistical and analytical information also is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. The consolidating and other supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information on pages 18-22 and the statistical and analytical information on pages 23-24, is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

Campbell, Myers & Rutledge, PLLC Certified Public Accountants Glasgow, Kentucky September 25, 2017

SHampton

New Stamp

SHampton

New Stamp

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY SCHEDULE I – CONSOLIDATING BALANCE SHEET

June 30, 2017 _____________

Page 19

South CentralRural

Telecommunications South Central Consolidating Consolidated Cooperative, Inc Telcom, LLC Entries Totals

Current assets:Cash and cash equivalents 2,519,747$ 1,935,885$ -$ 4,455,632$ Temporary cash investments 500,000 - - 500,000 Accounts and notes receivable, less

allowance for doubtful accountsof $43,805 879,635 2,226,291 (855,491) 2,250,435

Materials and supplies at average cost 2,525,986 - - 2,525,986 Accrued interest receivable 4,859 - - 4,859 Prepaid expenses 6,518,550 - - 6,518,550

Total current assets 12,948,777 4,162,176 (855,491) 16,255,462

Other assets:Marketable securities 31,997,396 - - 31,997,396

Nonregulated investments 800,225 - - 800,225

Investment in affiliated companies 94,645,842 - (15,815,956) 78,829,886 Other deferred charges 1,440,836 204,154 - 1,644,990

Total other assets 128,884,299 204,154 (15,815,956) 113,272,497

Telephone plant, at cost (substantiallyall pledged as collateral on long-term debt to RUS):

Telephone plant in service 187,589,344 23,878,030 - 211,467,374 Telephone plant under construction 11,966,633 - - 11,966,633

Total telephone plant 199,555,977 23,878,030 - 223,434,007 Less accumulated depreciation 148,034,546 11,371,167 - 159,405,713

Telephone plant, net 51,521,431 12,506,863 - 64,028,294

193,354,507$ 16,873,193$ (16,671,447)$ 193,556,253$

Current liabilities:

Accounts payable 5,106,946$ 1,057,237$ (855,491)$ 5,308,692$ Accrued expenses 3,298,768 - - 3,298,768

Total current liabilities 8,405,714 1,057,237 (855,491) 8,607,460

Long-term liabilities:Deferred taxes 14,851,605 - - 14,851,605 Other long-term liabilities 12,568,134 - - 12,568,134

Total long-term liabilities 27,419,739 - - 27,419,739

Members' equities:

Patronage capital 43,155,347 - - 43,155,347 Accumulated other comprehensive loss (9,246,031) - - (9,246,031) Other equities 121,961,826 15,815,956 (15,815,956) 121,961,826 Other member capital 1,657,912 - - 1,657,912

Total members' equities 157,529,054 15,815,956 (15,815,956) 157,529,054

193,354,507$ 16,873,193$ (16,671,447)$ 193,556,253$



ASSETS

TOTAL ASSETS

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY SCHEDULE II – CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended June 30, 2017 _____________

Page 20

South CentralRural


Operating revenues:Basic local network service 7,093,776$ -$ -$ 7,093,776$ Network access services revenues 11,966,132 - - 11,966,132 Carrier billing and collection 328,924 - - 328,924 Miscellaneous 1,208,314 - - 1,208,314

Total operating revenues 20,597,146 - - 20,597,146

Operating expenses:Plant specific operations 5,080,433 - - 5,080,433 Plant nonspecific operations 2,837,860 - - 2,837,860 Depreciation and amortization 9,584,659 - - 9,584,659 Customer operations 1,999,618 - - 1,999,618 Corporate operations 2,434,217 - - 2,434,217 Other operating taxes 1,212,216 - - 1,212,216

Total operating expenses 23,149,003 - - 23,149,003

Operating income (2,551,857) - - (2,551,857)

Nonoperating net income 24,577,312 - 90,655 24,667,967

Provision for income taxes (11,463,437) - - (11,463,437)

Nonregulated net income (loss) 842,464 (90,655) - 751,809

Net Income 11,404,482$ (90,655)$ 90,655$ 11,404,482$

Other comprehensive income (loss) Postretirement benefit other than pension: Unrecognized gain (loss) on assets (1,407,897) - - (1,407,897)$

Comprehensive income 9,996,585$ (90,655)$ 90,655$ 9,996,585$

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY SCHEDULE III – CONSOLIDATING BALANCE SHEET

June 30, 2016 _____________

Page 21

South CentralRural


Current assets:Cash and cash equivalents 2,078,634$ 1,296,059$ -$ 3,374,693$ Temporary cash investments 500,000 - - 500,000 Accounts and notes receivable, less

allowance for doubtful accountsof $55,935 987,732 2,204,066 (840,580) 2,351,218

Materials and supplies at average cost 2,659,477 - - 2,659,477

Accrued interest receivable 4,859 - - 4,859 Prepaid expenses 2,995,945 - - 2,995,945

Total current assets 9,226,647 3,500,125 (840,580) 11,886,192

Other assets:Marketable securities 40,525,960 - - 40,525,960

Nonregulated investments 823,666 - - 823,666

Investment in affiliated companies 82,420,682 - (15,956,611) 66,464,071 Other deferred charges 1,249,413 172,971 - 1,422,384

Total other assets 125,019,721 172,971 (15,956,611) 109,236,081

Telephone plant, at cost (substantiallyall pledged as collateral on long-term debt to RUS):

Telephone plant in service 187,335,784 23,136,400 - 210,472,184 Telephone plant under construction 8,859,008 - - 8,859,008

Total telephone plant 196,194,792 23,136,400 - 219,331,192 Less accumulated depreciation 147,185,290 9,788,860 - 156,974,150

Telephone plant, net 49,009,502 13,347,540 - 62,357,042

183,255,870$ 17,020,636$ (16,797,191)$ 183,479,315$

Current liabilities:Accounts payable 4,976,988$ 1,064,025$ (840,580) 5,200,433$ Accrued expenses 3,146,671 - - 3,146,671

Total current liabilities 8,123,659 1,064,025 (840,580) 8,347,104

Long-term liabilitiesDeferred taxes 15,238,787 15,238,787 Other long-term liabilities 10,873,628 - - 10,873,628

Total long-term liabilities 26,112,415 - - 26,112,415

Members' equities:Patronage capital 46,334,548 - - 46,334,548 Accumulated other comprehensive loss (7,838,134) - - (7,838,134) Other equities 108,757,296 15,956,611 (15,956,611) 108,757,296 Other member capital 1,766,086 - - 1,766,086

Total members' equities 149,019,796 15,956,611 (15,956,611) 149,019,796

183,255,870$ 17,020,636$ (16,797,191)$ 183,479,315$

ASSETS

TOTAL ASSETS



SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. AND SUBSIDIARY SCHEDULE IV – CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended June 30, 2016 _____________

Page 22

South CentralRural


Operating revenues:Basic local network service 7,171,828$ -$ -$ 7,171,828$ Network access services revenues 12,473,308 - - 12,473,308 Carrier billing and collection 445,975 - - 445,975 Miscellaneous 1,169,138 - - 1,169,138

Total operating revenues 21,260,249 - - 21,260,249

Operating expenses:Plant specific operations 4,969,775 - - 4,969,775 Plant nonspecific operations 2,601,804 - - 2,601,804 Depreciation and amortization 8,917,896 - - 8,917,896 Customer operations 1,839,547 - - 1,839,547 Corporate operations 3,070,295 - - 3,070,295 Other operating taxes 1,233,318 - - 1,233,318

Total operating expenses 22,632,635 - - 22,632,635

Operating income (1,372,386) - - (1,372,386)

Nonoperating net income 15,140,671 258 (258) 15,140,671

Provision for income taxes (5,308,939) - - (5,308,939)

Nonregulated net income (loss) (368,363) 109,181 (109,181) (368,363)

Net Income 8,090,983$ 109,439$ (109,439)$ 8,090,983$

Other comprehensive income (loss) Postretirement benefit other than pension: Unrecognized gain (loss) on assets 1,041,215 - - 1,041,215$

Comprehensive income 9,132,198$ 109,439$ (109,439)$ 9,132,198$

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. LIMITED DATA – SCRTC ONLY

STATISTICAL AND ANALYTICAL INFORMATION June 30, 2017 and 2016

_____________

Page 23

2017 2016

Telephone Plant in Service - June 30: 187,589,344$ 187,335,784$

Investment per subscriber - June 30 8,067 8,003 Investment per dollar of operating

revenue 9.11 8.81

Depreciation Reserve - June 30: 148,034,546 147,185,290

Percent of plant in service 78.91% 78.57%

Annual depreciation 9,584,659 8,917,896

Percent of annual depreciation to plant in service 5.11% 4.76%

Average Annual Revenue Per Subscriber:

Local service 305 306

Toll service and access charges 515 533

Total operating revenue 886 908

Number of Stations - June 30:

Residence:

Main stations 20,354 20,420

Business:

Main stations (access lines) 2,901 2,988

Total main stations 23,255 23,408

Computations involving number of subscribers are based on the number of subscribers at June 30.

SOUTH CENTRAL RURAL TELECOMMUNICATIONS COOPERATIVE, INC. LIMITED DATA – SCRTC ONLY

STATISTICAL AND ANALYTICAL INFORMATION, CONCLUDED June 30, 2017 and 2016

____________

Page 24

For the year ended June 30, Amount Percent Amount PercentLocal network service 7,093,776$ 34.44% 7,171,828$ 33.73%Network access and long-

distance network service 11,966,132 58.10% 12,473,308 58.67%Miscellaneous 1,537,238 7.46% 1,615,113 7.60%

Total operating revenue 20,597,146 100.00% 21,260,249 100.00%

Cost of telephone service, net of other income and expenses 9,192,664 44.63% 13,169,266 61.94%

Net income 11,404,482$ 55.37% 8,090,983$ 38.06%

Source of Funds Invested in Amount Percent Amount PercentTotal Assets - June 30:

Members' equities 157,529,054$ 81.47% 149,019,796$ 81.32%Long-term liabilities 27,419,739 14.18% 26,112,415 14.25%Other liabilities 8,405,714 4.35% 8,123,659 4.43%

Total assets 193,354,507$ 100.00% 183,255,870$ 100.00%

2016

2017 2016

2017

Independent Auditors’ Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Board of Directors South Central Rural Telecommunications Cooperative, Inc. Glasgow, Kentucky 42141

We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of South Central Rural Telecommunications Cooperative, Inc. and subsidiary which comprise the consolidated balance sheets as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, patronage capital and other equities, and cash flows for the years then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated September 25, 2017.

Internal Control over Financial Reporting

In planning and performing our audit of the financial statements, we considered South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s internal control. Accordingly, we do not express an opinion on the effectiveness of South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

SHampton

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SHampton

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Compliance and Other Matters

As part of obtaining reasonable assurance about whether South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Campbell, Myers & Rutledge, PLLC

Certified Public Accountants Glasgow, Kentucky September 25, 2017

Independent Auditors’ Report on Compliance with Aspects of Contractual Agreements and Regulatory Requirements

For Telecommunication Borrowers

Board of Directors South Central Rural Telecommunications Cooperative, Inc. Glasgow, Kentucky 42141

Independent Auditor’s Report

We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of South Central Rural Telecommunications Cooperative, Inc. and subsidiary, which comprise the balance sheets as of June 30, 2017 and 2016, and the related statements of operations, comprehensive income, patronage capital and other equities, and cash flows for the years ended, and the related notes to the financial statements, and have issued our report thereon dated September 25, 2017. In accordance with Government Auditing Standards, we have also issued our report dated September 25, 2017, on our consideration of South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. No reports other than the reports referred to above have been furnished to management. In connection with our audit, nothing came to our attention that caused us to believe that South Central Rural Telecommunications Cooperative, Inc. and subsidiary failed to comply with the terms, covenants, provisions, or conditions of their loan, grant, and security instruments as set forth in 7 CFR Part 1773, Policy on Audits of Rural Utilities Service Borrowers, &1773.33 clarified in the RUS policy memorandum dated September 25, 2017, insofar as they relate to accounting matters as enumerated below. However, our audit was not directed primarily toward obtaining knowledge of noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s noncompliance with the above-referenced terms, covenants, provisions, or conditions of the contractual agreements and regulatory requirements, insofar as they relate to accounting matters. In connection with our audit, we noted no matters regarding South Central Rural Telecommunications Cooperative, Inc. and subsidiary’s accounting and records to indicate that South Central Rural Telecommunications Cooperative, Inc. and subsidiary did not: Maintain adequate and effective accounting procedures; Utilize adequate and fair methods for accumulating and recording labor, material, and overhead costs, and the distribution of these costs to construction, retirement, and maintenance or other expense accounts;

SHampton

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SHampton

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Reconcile continuing property records to the controlling general ledger plant accounts; Clear construction accounts and accrue depreciation on completed construction; Record and properly price the retirement of plant; Seek approval of the sale, lease or transfer of capital assets and disposition of proceeds for the sale or lease of plant, material, or scrap; Maintain adequate control over materials and supplies; Prepare accurate and timely Financial and Operating Reports; Obtain RUS approval to enter into any contract for the management, operation, or maintenance of the borrower’s system if the contract covers all or substantially all of the electric system; Disclose material related party transactions in the financial statements, in accordance with requirements for related parties in generally accepted accounting principles; Comply with the requirements for the detailed schedule of deferred debits and deferred credits which is as follows:

Deferred Debits: 2017 2016Prepaid Insurance -$ 32,263$ Job Orders 72,164 200,276 South Central Telcom Construction 1,572,826 1,189,845

1,644,990$ 1,422,384$ Record deprecation in accordance with RUS requirements (See RUS Bulletin 183-1, Depreciation Rates and Procedures); and Comply with the requirements for the detailed schedule of investments. A detailed schedule of investments is as follows:

RSA #3 Partnership represents the Cooperative’s 25% investment in a partnership which provides cellular telephone service. The Cooperative accounts for the investment on the equity basis. RSA #4 represents the Cooperative’s 50% investment in a partnership which provides cellular telephone service. The Cooperative accounts for the investment on the equity basis. Cumberland Cellular Partnership represents the Cooperative’s 12.5% investment in a partnership which provides cellular telephone service. The Cooperative accounts for the investment on the equity basis. Bluegrass Network LLC represents the Cooperative’s 20% investment in a partnership which provides cellular telephone service. The Cooperative accounts for the investment on the equity basis. Bluegrass Telcom LLC represents the Cooperative’s 20% investment in a partnership which provides cellular telephone service. The Cooperative accounts for the investment on the equity basis.

RSA #3 RSA #4 RSA #5 TotalBook Value of Investment as of 12/31/14 19,031,219$ 29,762,597$ 6,910,057$ 4,570,308$ 326,680$ 60,600,861$ Dividends as of 12/31/15 2,387,500$ 4,300,000$ 807,344$ 200,000$ 50,850$ Undistributed Earnings/(Loss) as of 12/31/15 4,016,540$ 7,097,581$ 1,648,737$ 789,771$ 56,275$ Book Value of Investment as of 12/31/15 20,660,259$ 32,560,178$ 7,751,450$ 5,160,079$ 332,105$ 66,464,071$ Dividends as of 12/31/16 3,614,000$ 6,268,800$ 1,153,250$ 200,000$ 87,048$ Undistributed Earnings/(Loss) as of 12/31/16 8,312,959$ 12,166,722$ 2,647,405$ 499,124$ 62,703$ Book Value of Investment as of 12/31/16 25,359,218$ 38,458,100$ 9,245,605$ 5,459,203$ 307,760$ 78,829,886$

Bluegrass Network LLC

Bluegrass Telecom LLC

This report is intended solely for the information and use of the board of directors, management, and the RUS and supplemental lenders and is not intended to be and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited.

Campbell, Myers & Rutledge, PLLC Glasgow, Kentucky September 25, 2017

south central rural telecommunications … · in accordance with government auditing standards, we...

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